Monsoon Arrives in Kerala

Monsoon Arrives in Kerala
India Meteorological Department (IMD) has declared the onset of monsoon over the Kerala coast on a day when it also saw a prospective cyclone brewing in the Arabian Sea.

The IMD joined peer numerical weather prediction models to project that the depression (spinning up overnight from a ‘low') over east-central and adjoining west-central and south Arabian Sea would intensify into a cyclonic storm.

MONSOON ADVANCE

On Monday afternoon, the causative depression was centred about 1,050 km southwest of Mumbai and an equal distance away from south-southwest of Naliya.

In one fell swoop, the monsoon current was shown as having covered entire Kerala with the northern limit passing through the northern-most district of Kannur, and Salem and Nagapattinam in neighbouring Tamil Nadu.

Conditions are favourable for its further advance into some parts of central Arabian Sea, coastal and south interior Karnataka and Goa during the next two days.

Further advance of monsoon will depend upon the intensity and direction of movement of the storm, the forecast said.

A satellite imagery showed convective clouds over parts of southeast and east-central Arabian Sea and Andaman Sea.

Forecast up to Saturday suggested fairly widespread rain or thundershowers over Kerala, Lakshadweep, coastal Karnataka, the Northeastern States and Andaman and Nicobar Islands.

Rubber Climbs for Fourth Day on Low Supplies, Crude Oil Rally


May 31 (Bloomberg) -- Rubber advanced for a fourth day, paring a monthly loss, as low supplies from major producers and a rally in crude oil enhanced the appeal of the commodity used to make tires.

Futures in Tokyo extended two weeks of gains amid concerns that supplies may not be adequate to meet growing demand. Crude oil rose for third time in four days after the dollar fell against the euro, bolstering the appeal of commodities as a hedge against inflation.

“Supplies remain low,” Chaiwat Muenmee, an analyst at broker DS Futures Co., said by phone from Bangkok. “Coupled with rising oil prices, it helped boost gains on Tocom.”

Depleted supply after the end of the annual February-to- April low-production season, together with robust demand in Asia, will support the market, the Association of Natural Rubber Producing Countries said in its May newsletter.

Demand from China, India and Malaysia, which account for more than 45 percent of global consumption, should stay strong, the association said.

Rubber for November delivery, the most-active contract, rose as much as 0.8 percent to 287.2 yen per kilogram ($3,142 a metric ton) before settling at 285.1 yen on the Tokyo Commodity Exchange. It fell as much as 1.2 percent earlier.

“The market remains capped by concern that Europe’s debt crisis will stall economic recovery,” Kazuhiko Saito, an analyst at commodity broker Fujitomi Co. in Tokyo, said today.

Debt Concerns

Still, the most-active contract dropped for a second month, losing 2.7 percent, after investors reduced holdings of risky assets amid concern that Europe’s debt crisis will spur governments to reduce spending, slowing the region’s economic recovery. The yen fell to a one-week low after Japan’s Social Democratic Party left the three-way coalition government.

Fitch Ratings cut Spain’s AAA credit rating by one level last week, saying the nation’s debts will likely weigh on growth. Spain has the third-largest budget deficit in the euro region, where policy makers have pledged almost $1 trillion of loans to support the weakest economies and the regional currency. The rating cut for Spain increased concern that raw material demand in Europe may slow.

“A sense of caution is increasing,” said Norikazu Kitta, a strategist at Nikko Cordial Securities Inc. “Financial issues in Europe are spreading.”

Rubber cash prices in Thailand, the largest exporter, extended gains as increasing demand outpaced supply, the Rubber Research Institute of Thailand said on its website today.

Thai RSS-3 grade rubber for June delivery added 0.8 percent to 126.40 baht ($3.89) a kilogram today.

September-delivery rubber on the Shanghai Futures Exchange dropped 0.5 percent to settle at 22,845 yuan ($3,346) a ton.



The importance of regulating commodity futures markets
Speculative trading in global commodity futures markets has been closely related to the dramatic volatility in commodity markets in the past three years. Now financial regulation in the US seeks to control some of this activity. C. P. Chandrasekhar and Jayati Ghosh examine recent trends in commodity prices, consider the implications of the proposed regulation and the extent to which it will help to curb volatility in global commodity prices.

In the US, moves are afoot to bring about better regulation of the various financial markets that have caused so much panic and distress in the world economy in the past few years. The attempts at regulatory reform cover a wide range of areas, but in certain areas they have direct significance for the rest of the world, especially developing countries. One of the most important aspects of the legislation that has been passed by the US Senate (which still has to be reconciled with the version passed by the US House of Representatives) has to do with derivatives markets and their effects on commodity trading.

It is now widely accepted that increasing financial involvement in primary commodity markets (including oil, minerals and agricultural products) played a significant role in generating or amplifying price volatility in these markets.

While financial involvement in commodity markets has been growing since the early 2000s, the impact of these players has been particularly evident since early 2007, causing dramatic and rapid changes in world prices of these goods in both futures and spot markets. There were huge increases in most commodity prices between January 2007 and June 2008, followed by collapses in price until early 2009, followed by significant increases once again until early 2010.

Price fluctuation



Chart 1 indicates the extent to which the spot prices of the major categories of primary commodities fluctuated in the period since the start of 2005. (The source of data for all charts is IMF commodity price statistics online.)

The indices described here are on the basis of prices in SDR terms, so they minimise the effect of exchange rate changes that have also characterised the recent past. (It should be noted, however, that the prices of most primary commodities in world trade are still negotiated and transacted in US dollar terms.) It is evident that the period, especially after January 2007, was marked by remarkable volatility to an extent that may be unprecedented for such a short period of time.

Fuel prices have been the most volatile, led by the prices of petroleum, which fluctuated the most over this period. Oil prices have always been an important indicator of economic perceptions, and contracts worked out in the futures markets have become pointers to the state of expectations not just about oil supply and demand (which incidentally hardly changed over this period), but even more about possible changes in global output and inflation. Increasingly, however, futures markets as in oil as well as other commodities have started reflecting the concentration of financial activity.

Of course oil prices directly affect the real economy in all countries, since energy is a universal intermediate that enters into the price of all other goods. So fuel price volatility has huge and typically unpleasant results in developing countries. But in some ways the trends in international food prices have had even more devastating implications in many developing countries.



Chart 2 indicates that food prices have also been very volatile over this period. While the overall edibles price index nearly doubled before falling and then rising again, prices of certain commodities such as wheat and sunflower oil showed much greater volatility. It is worth noting that these are both commodities in which the futures markets are well developed and in which index traders have shown a great deal of interest.

Confusing signals

These price changes had hugely adverse effects in the developing world. They sent out confusing, misleading and often completely wrong price signals to farmers that caused over-sowing in some phases and under-cultivation in others.

They created havoc among mineral exporters who were not sure of the prices at which they should sign export contracts. Consumers were especially badly affected: while the increase in global prices tended to be transmitted (even if not fully) to consumers in developing countries, when global prices fell there was no such immediate tendency.



In any case, as Chart 3 shows, despite the wide fluctuations from trough to peak, over the period since January 2007 there has been a significant increase in prices of globally traded food items. This has had an especially adverse effect because this is also the period in which the global financial crisis and recession have affected employment, wages and livelihood of petty producers across the world. The continued rise in food prices in many developing countries has impacted on the incidence of poverty and hunger, and become a political issue of some importance.

So both the direct producers and consumers lost out because of this price instability. The only gainers were the financial and marketing intermediaries, typically large corporations, which were able to profit from rapidly changing prices.

Global commodity prices have always been volatile to some degree and prone to boom-bust cycles. In the 1950s and 1960s, commodity boards and international commodity agreements were seen as one means of stabilising global prices. Since their decline from the mid-1970s, and especially as financial deregulation and innovation became more pronounced from the early 1980s, the emergence of commodity futures markets was touted as providing the advantages of such agreements in a more market-friendly framework.

There were several features of such futures markets that were perceived to be of value: they allowed for better risk management through hedging by different layers of producers, consumers and intermediaries; they enabled open-market price discovery of commodities through buying and selling on the exchanges; they were therefore perceived to lower transaction costs.

Financial deregulation in the early part of the current decade gave a major boost to the entry of new financial players into the commodity exchanges. In the US, which has the greatest volume and turnover of both spot and future commodity trading, the significant regulatory transformation occurred in 2000. While commodity futures contracts existed before, they were traded only on regulated exchanges under the control of the Commodity Futures Trading Commission (CFTC), which required traders to disclose their holdings of each commodity and stick to specified position limits, so as to prevent market manipulation. Therefore they were dominated by commercial players who were using it for the reasons mentioned above, rather than for mainly speculative purposes.

In 2000, the Commodity Futures Modernization Act effectively deregulated commodity trading in the US, by exempting over-the-counter (OTC) commodity trading (outside of regulated exchanges) from CFTC oversight. Soon after this, several unregulated commodity exchanges opened. These allowed any and all investors, including hedge funds, pension funds and investment banks, to trade commodity futures contracts without any position limits, disclosure requirements, or regulatory oversight.

The value of such unregulated trading zoomed to reach around $9 trillion at the end of 2007, which was estimated to be more than twice the value of the commodity contracts on the regulated exchanges. According to the Bank for International Settlements, the value of outstanding amounts of OTC commodity-linked derivatives for commodities other than gold and precious metals increased from $5.85 trillion in June 2006 to $7.05 trillion in June 2007 to as much as $12.39 trillion in June 2008.

Index traders

Unlike producers and consumers who use such markets for hedging purposes, financial firms and other speculators increasingly entered the market to profit from short-term changes in price. They were aided by the ‘swap-dealer loophole' in the 2000 legislation, which allowed traders to use swap agreements to take long-term positions in commodity indexes.

There was a consequent emergence of commodity index funds that were essentially ‘index traders' who focus on returns from changes in the index of a commodity, by periodically rolling over commodity futures contracts prior to their maturity date and reinvesting the proceeds in new contracts.

A study by Christopher Gilbert (‘Speculative influences on commodity futures 2006-08', UNCTAD Discussion Paper No 197, Geneva) has found that index traders amplified price volatility to the extent of 30 per cent in oil and metals prices and around 15 per cent in foodgrains prices.

Such commodity funds dealt only in forward positions with no physical ownership of the commodities involved. This further aggravated the treatment of these markets as vehicles for a diversified portfolio of commodities (including not only food but also raw materials and energy) as an asset class, rather than as mechanisms for managing the risk of actual producers and consumers.

The CFTC estimated that of the $161 billion of commodity index business in the US markets at the end of June 30, 2008, approximately 24 per cent was held by index funds, 42 per cent by institutional investors, 9 per cent by sovereign wealth funds and the remaining 25 per cent by other traders.

An official probe by the US Senate found “substantial and persuasive evidence” that non-commercial traders pushed up futures prices, disrupted convergence between futures and cash prices and increased costs for farmers, the grain industry and consumers.

Proposed regulation

Now, one important proposal in the financial reform legislation passed by the US Senate seeks to plug, at least partially, the loopholes that allowed such frenzied activity in commodity futures markets. It requires that previously unregulated over-the-counter (OTC) trades be traded on public exchanges.

This would reverse the effect of the 2000 Act, and enable the CFTC to analyse daily trade data and determine when traders have exceeded the CFTC's commodity-specific position limits (which provide a percentage ceiling for all commodity contracts open for trade during a specific trading period). It has been estimated that around 90 per cent of this market in the US would move from over-the-counter swaps trading to the more transparent and capitalised exchange trading environment for futures contracts.

In addition, another important amendment brought by Senator Blanche Lincoln of Arkansas would force the banks to spin off their highly profitable derivative trading into entities that would be separate from their commercial banking. Section 716 (‘Prohibition against Federal Government Bailouts of Swaps Entities') would sharply reduce the possibility of taxpayer-financed bailouts for speculative activity that does not serve the real economy. This would mean that purely commercial banks with guaranteed deposits would have much lower dependence on the unregulated and risky over-the-counter swaps market.

It would also, of course, reduce the profitability of the big banks that have been able to hunt with the hounds and run with the hares through such OTC transactions. As expected, this particular provision is under sharp attack from the US finance industry, with major banks such as Morgan Stanley and Goldman Sachs lobbying fiercely to remove it. Both the Chairperson of the Federal Deposit Insurance Corporation Sheila Bair, and the head of the Federal Reserve Ben Bernanke, have spoken out against it, saying it could destabilise the financial system. The danger is that during the “reconciliation” process of the Senate and House bills, which is typically conducted behind closed doors, the financial lobbyists will win and the motion may get killed.

Positive changes?

That is only one of the dangers. Another is that providing muscle to regulators need not ensure that the regulators do their job appropriately. So even if the CFTC acquires the ability to control and regulate trading activity in commodity futures, its actions may not be so effective. For example, in late January this year the CFTC announced that it would place position limits on oil, natural gas, heating oil and gasoline futures. However, the limits announced were so high that, even by the CFTC's own calculations, they were unlikely to affect much of the trade.

There have also been arguments that such activity will simply move to other players, such as hedge funds, which are expected to be major beneficiaries of the move. Or that OTC contracts in commodity futures will increasingly take place in other financial centres, in London, Tokyo or even Singapore. But such arguments underestimate the tremendous influence of the US in shaping financial systems globally. Thus far it could be argued that this influence has essentially been a negative force, but if even these relatively limited new regulations actually come into play, they could force some positive changes elsewhere as well.

So, just as the deregulation of US markets contributed to excessive speculation and global price volatility, the regulatory reform measures — if they are properly defined and implemented in the right spirit — could operate to prevent future episodes of the very extreme volatility that is so damaging to developing countries.

Of course, this does not in any way mean that the world food crisis is over, or that commodity prices will not continue to behave in a volatile fashion without other measures adopted by governments. At best it may simply mean that developing countries will get some breathing space from excessive price volatility that should help them to get the policies in place to tackle the real problems in the food economy and elsewhere. And the need to put such measures into place, to revive the food economy within countries and ensure adequate and universal distribution of essential food items, is more pressing than ever.